Consultation Paper

Section 11: Taxes on specific goods and services

Overview

In addition to the broad-based GST, there is also a range of consumption or other indirect taxes levied on narrow bases, including excise collected by the Australian Government, and other taxes collected by the States. Products subject to these narrow-base taxes, are taxed relatively more heavily than other consumption goods.

The decision whether to tax some consumption goods more highly than others, and the optimal design of a particular tax, depends on the policy objective it is trying to achieve.

The current tax arrangements for beer, wine, spirits, tobacco and luxury cars reflect a range of competing policy goals. They exist in the context of other forms of regulation and the broader tax-transfer system.

Consultation questions

Q11.1 Is it appropriate to use taxes on specific goods or services to influence individual consumption choices, and if so, what principles can be applied in designing the structure and rates of such taxes?

Q11.2 Can the competing potential objectives of alcohol taxation, including revenue raising, health policy and industry assistance, be resolved? What does this mean for the decision to tax alcohol more than other commodities?

Q11.3 What is the appropriate specific goal of taxing tobacco? Is it necessary to change the structure or rate of tobacco taxes?

Q11.4 If health and other social costs represent the principal rationale for specific taxes on alcohol and tobacco, is any purpose served in retaining duty free concessions for passenger importation of these items?

Q11.5 Are taxes on specific 'luxury' goods an effective way of making the tax system more progressive? If so, what principles should apply to the design and coverage of these taxes?

Q11.6 Should the tax system have a role in influencing the relative prices of different types of cars, including luxury cars and higher polluting cars, and if so on what basis? What does this mean for taxes on the purchase price of motor vehicles?

In addition to the GST, there are other taxes that affect goods and services. The Australian government imposes additional taxes on beer, wine, spirits, tobacco, luxury cars, and motor vehicle fuel. State governments also impose taxes on particular services, including taxes related to motor vehicles (see Section 12.1), insurance services and gambling (see Section 9.2). Governments also levy smaller taxes and levies on other goods for notional cost recovery or resource allocation purposes — these are not discussed here.

As discussed in Section 3.3, there may be sound policy rationales for taxing some goods and services more heavily than others. The potential policy objectives for a specific consumption tax — such as efficient revenue raising, reflecting social costs, discouraging consumption, indirectly charging for government services, or meeting other objectives — affect the structure, design and size of the tax. For example, a tax designed to raise revenue efficiently would be set independently of any associated social costs. A tax imposed for cost-recovery purposes would be designed differently again.

This section examines some of the potential justifications for existing taxes on alcohol, tobacco and luxury cars.

11.1 Taxes on alcohol

Alcohol produced commercially for human consumption in Australia is subject to specific taxes through a number of different regimes. Beer and spirits are subject to excise at eight different rates. Wine is subject to the wine equalisation tax, which is based on the value of the wine. Rebates are available to small producers.

The result is that very different amounts of tax are payable on a standard drink depending on beverage type, alcohol concentration, container size, size of producer and the pre-tax price of the product.

Summary of key messages from submissions

Many submissions are concerned with the complexity of the existing tax structure. They argue that current arrangements reflect historical compromises between a range of policy objectives — raising revenue, protecting domestic industry and improving public health.

Many submissions note the existing structure of alcohol taxation contains many arbitrary elements and is unnecessarily complex. As examples, submissions state that beer supplied in containers larger than 48 litres is more lightly taxed than other beer; a 1.15 per cent excise-free threshold applies to beer, but not spirit-based beverages; some imported spirits are subject to a 5 per cent customs tariff; and wine is taxed on value, rather than alcohol content, with small producers paying no wine tax.

Industry submissions note that the tax structure has different effects on different industries. One submission from the wine industry supports the status quo, noting that because of the wine equalisation tax (WET) rebate, 96 per cent of wineries do not bear any WET impost — the submission argues that this is justified due to external economic benefits smaller wineries provide for regional development.

Other submissions argue that the tax system should be neutral between the beer, wine and spirits industries — some submissions argue that small wineries receive favourable treatment relative to microbreweries.

Some submissions, particularly from the health sector, suggest replacing separate tax treatment of beer, wine and spirits-based beverages with a tax based on alcohol content given the significant health problems associated with alcohol abuse, and that alcohol taxation is an effective way to reduce aggregate consumption.

Other submissions argue that alcohol taxation has only a limited role in addressing public health concerns. Some submissions stress that the harms from alcohol depend on the context in which alcohol is consumed, arguing that intervention programs targeted at specific groups or behaviours are a better way to address alcohol-related harm.

Under a system of 'volumetric taxation' proposed by some submissions, tax would be determined entirely by the volume of alcohol, regardless of what the product is made from, where it is consumed or how it is packaged. In addition, one public health advocate suggests a 'floor price' for alcohol sales. Some submissions further argue that high alcohol concentration is riskier than low-alcohol products, and therefore high alcohol products should be taxed disproportionately.

Modelling presented by some industry groups suggests that a revenue-neutral shift to volumetric taxation would decrease the price of spirits and increase the price of cheap wine. Some submissions oppose the introduction of volumetric taxation, on the basis that some beverages should be taxed differently, for different reasons, irrespective of alcohol content. Some submissions also argue that volumetric taxation would create opportunities for new products or risky drinking patterns that could not be addressed through the tax system.

Raising revenue efficiently

One rationale for imposing specific taxes on alcohol is that it is a relatively efficient way of raising revenue. This reflects one theory of taxation that those commodities that are less responsive to price should be taxed more heavily, because this minimises the distortion that taxes have on economic decisions (Ramsey 1927). Taxing alcohol — and also other consumption items such as 'necessities' for which consumption does not vary greatly with price — is relatively more efficient than taxing specific commodities that are highly responsive to price. An Australian estimate found that a 10 per cent increase in the price of alcohol would reduce consumption by around 6 per cent (Selvanathan and Selvanathan 2004).

Although this principle might be used to justify additional taxation of alcohol as a whole, it has not been followed for setting rates for specific alcohol products. Recent Australian estimates suggest that both beer and wine are less responsive to price than spirits.14 However, spirits are taxed more highly than beer and most wines.

Benefits and costs of alcohol consumption to the consumer

Around five in six Australian adults drink alcohol. Australian survey data shows an association between daily consumption of small amounts of alcohol and high reported levels of wellbeing (Cummins 2008).

On the other hand, submissions from the health sector stress alcohol use, particularly binge drinking or sustained heavy drinking, can harm the consumer. This can be both in an immediate sense (including road traffic accidents and other injuries) and over the long term (including cancer, cirrhosis of the liver and other diseases).

Survey results indicate that 35 per cent of people drink at levels that place them at risk of short-term harm and 10 per cent of people drink at levels putting them at risk in the long term (Australian Institute of Health and Welfare 2008). These patterns of drinking led to an estimated 3,100 deaths and 72,000 hospitalisations per year from 1992-2001 (Chikritzhs et al 2003).

Submissions argue that taxing alcohol is an effective way of reducing harm from alcohol use. Tax is not the only way to do this. Other policies with the same aim include regulating the physical availability of alcohol (for example, through licensing restrictions), restricting advertising, providing information (for example, through labeling requirements and education), and policing (including random breath testing).

A threshold question underpinning taxation of potentially harmful activities is whether it is appropriate to use tax policy to minimise the costs that individuals impose only on themselves. For example, many individuals undertake other activities or use products that pose a risk to themselves. Sometimes these activities are regulated or even prohibited, but in most cases tax is not used. Moreover, where tax is effective in reducing demand for one product, an individual's alternative consumption choices may also have some risks.

Social costs of alcohol use

Alcohol use can impose costs on people other than the consumer. It sometimes harms others through road accidents, the cost to the health system and the cost of crime. Collins and Lapsley (2008) estimate these costs to be around $2.2 billion, $2.0 billion and $1.4 billion, respectively.

Where the social cost per unit of alcohol can be reasonably estimated, tax might be used as an instrument to incorporate the costs imposed on others into the price of alcohol, and therefore to reduce consumption to a socially optimal level (see Box 11.1).

However, some submissions argue that alcohol taxes may not be an effective way to target social costs. A tax on the production or importation of alcohol does not discriminate between consumption that does and does not impose costs on others. The impact of tax-induced price changes also varies from individual to individual. An individual's consumption patterns are influenced by many factors other than price, including age, sex, income, alcohol availability, cultural setting, marketing, and the potential for alcohol dependence.

This means that while alcohol taxation does reduce the aggregate consumption of alcohol, and therefore some of the costs of alcohol abuse, it also reduces satisfaction of individuals whose consumption does not harm others.

Uniform taxation of alcohol

Many submissions suggest that a consistent tax applied to all alcohol, whether consumed in beer, wine or spirits based beverages, would be more coherent than the present arrangements. Some submissions point out that under the current regime, the amount of tax (either excise or wine equalisation tax) payable per unit of alcohol varies significantly (see Chart 11.1).

Chart 11.1: Tax per standard drink (2008-09)

Assumes 12.5 per cent alc/vol. wine, 750ml wine bottle. The wine equalisation tax (WET) payable is calculated using the half retail price method, with WET liability fully offset by producer rebate for small producers, and no effect of WET producer rebate for the large producer.

Includes 1.15 per cent alc/vol concession for 5.0 per cent alc/vol beer. A standard drink is equal to 12.67ml or 10 grams of pure alcohol.

Source: Australian Treasury estimates.

Many submissions support the taxation of all alcoholic beverages, based on the volume of alcohol in the beverage. The major argument from a health perspective is that the ingredient responsible for alcohol-related harm (whether to self or others) is alcohol, and therefore it is this ingredient that should be taxed, regardless of how it is delivered. Some submissions argue an ideal alcohol tax should tax low-alcohol beverages disproportionately less than stronger products, on the basis that drinking low-alcohol products entails less risk.

As submissions note, adopting a volumetric approach to all alcohol would affect the relative prices of different beverages, particularly wine, which is currently taxed based on value. A volumetric tax on wine, for example, would increase the price of cheap wine relative to expensive wine.

From an efficiency perspective, applying the same rate of tax to different types of alcoholic beverages may make the tax system more neutral in influencing consumer preferences and industrial production.

Box 11.1: Taxing to control social costs

It is sometimes possible to improve overall welfare by taxing the consumption of particular commodities that cause social harm. The purpose of imposing such a tax is to ensure the price paid by a consumer reflects the cost consumption imposes on others. Individuals then face incentives (through higher prices) to reduce consumption to a socially optimal level.

However, the social cost of consuming an extra unit of alcohol varies from consumer to consumer. A person who consumes two light beers instead of one may not impose costs on others. An inebriated person in a risky environment who consumes an additional drink may impose significant additional social costs. Taxes on alcohol production do not discriminate between cases where the marginal social cost is high and cases where it is low.

These differences are illustrated in Chart 11.2, in which curve DA reflects the demand for alcohol from a high-risk drinker (who imposes increasing costs on others per unit of drink), while curve DB reflects the demand from a low-risk drinker, where the social costs are minimal. Imposing a tax on alcohol reduces the demand in both markets (from xA to xA1, and from xB to xB1).

Although this would reduce the satisfaction of high-risk drinkers (area c), this may be less than the reduction in harm caused to others (area a + c), in which case society as a whole benefits from the reduction in high-risk consumption. However, the tax would also reduce the satisfaction of those whose consumption is low-risk (area b), reducing the benefit from the tax.

Chart 11.2: Taxing to control social costs

Note: Adapted from Pogue and Sgontz (1989).

Distributional issues

Different income groups have different tastes in alcohol and different levels of spending on alcohol in general (see Chart 11.3). Any change to the taxation of alcohol will therefore have distributional consequences, although consumer choices are likely to change over time.

Chart 11.3: Spending on alcohol as a percentage of gross household income

By gross income quintile (2003-04)

Source: ABS (2006a).

Consultation questions

Q11.1 Is it appropriate to use taxes on specific goods or services to influence individual consumption choices, and if so, what principles can be applied in designing the structure and rates of such taxes?

Q11.2 Can the competing potential objectives of alcohol taxation, including revenue raising, health policy and industry assistance, be resolved? What does this mean for the decision to tax alcohol more than other commodities?

11.2 Taxes on tobacco

Cigarettes and cigars with up to 0.8 grams of tobacco per stick are taxed on a per stick basis. Rates are indexed twice a year in line with the consumer price index. The per stick excise is $0.2545 or $6.36 on a pack of 25 cigarettes. All other tobacco products, such as snuff and rolling tobacco, are subject to an equivalent excise rate of $318.14 per kilogram. There are relatively few concessions or exemptions from tobacco excise. Inbound passengers to Australia enjoy access to limited quantities of duty-free tobacco and excise-free tobacco is available on certain Australian military sea vessels in Australian waters.

Smoking rates have been declining in Australia for many years. Revenue raised from tobacco excise has been flat in real terms over the part 10 years. Chart 11.4 compares smoking rates in Australia over the past 17 years with real revenue from tobacco excise.

Chart 11.4: Smoking prevalence and tobacco excise revenue

1991-92 to 2007-08 (2007-08 dollars)

Source: ABS (2008h); AIHW (2008); Australian Government (2008a).

In 2007, 19 per cent of adult Australians were smokers, of whom 86 per cent were regular daily smokers. Fifty-five per cent of adults had never smoked regularly, and the remaining 25 per cent were ex-smokers. More males than females smoked (21 per cent compared to 18 per cent). Smoking rates are also higher among people aged between 20 and 49 (Australian Institute of Health and Welfare 2008). Indigenous Australians also have higher smoking rates, with 50 per cent of adults identified as daily smokers in 2004-05 (ABS 2006c).

Summary of key messages from submissions

The health sector supports increasing taxes on tobacco (by roughly one third — around $0.075 per stick) as an important means of reducing tobacco use and its associated health impacts. Some submissions also advocate the abolition of duty-free tobacco.

The tobacco industry argues the current regime of tobacco taxation provides certainty for industry, consumers and government, while helping to control tobacco use and providing government with a significant and stable revenue stream.

Both the health sector and the industry acknowledge higher taxes on tobacco would increase incentives for illicit trade in untaxed tobacco, by way of smuggled cigarettes and tobacco leaf, or 'counterfeit' cigarettes purporting to be legally produced and taxed. The health sector believes tighter regulation and enforcement would be necessary to control the illicit trade. The industry believes the risk of more illicit trade is an argument against increasing tobacco taxes.

Users of smokeless tobacco, snuff and related products, argue these products have less severe health impacts than smoking and should therefore be taxed at a lower rate.

Responsiveness of consumption to price

Compared with many other consumer goods, tobacco consumption is relatively unresponsive to price. Most estimates suggest that a 1 per cent increase in the price of cigarettes will reduce total consumption by 0.4 per cent. This suggests that taxing tobacco, like alcohol, provides a relatively efficient source of revenue.

This also implies that the scope to control consumption with tax is limited. However, the impact of tobacco taxes on different groups may vary, as some subgroups in the smoking population are more responsive to price than others. Data from the United Kingdom suggest women are more responsive to price than men, people in lower socioeconomic groups are more responsive than people in higher groups, and young people are more responsive than adults (Chaloupka 1999). Moreover, those who are already dependent on tobacco may respond differently to price changes than occasional or potential smokers.

Studies using individual level data suggest the prevalence of smoking is less responsive to price than overall consumption — a 1 per cent increase in the price of cigarettes will decrease the proportion of the population that smokes by around 0.25 per cent.

Health impacts on the smoker

The Australian Institute of Health and Welfare estimates that in 2003 tobacco smoking was responsible for about 8 per cent of the total burden of disease and injury for all Australians (Begg et al 2007). In particular, smoking is a leading cause of lung cancer and respiratory diseases such as emphysema and chronic bronchitis.

Costs imposed on others

Smoking can impose very heavy costs on the smoker but can also impose costs on non-smokers. For example, passive smoking can affect the health of non-smokers, and babies born to mothers who smoke are likely to experience worse than average health and developmental outcomes. These effects impose costs on the affected individuals and on the wider community through the health and education systems.

Some of the costs of ill health caused by smoking are borne by taxpayers through the public health system. However, the net impact of smoking on direct health and transfer costs is unclear. The direct costs of smoking-related disease may be offset by reductions in pensions and health expenditures due to reduced longevity. Collins and Lapsley (2008) estimate the net health-care cost from tobacco to be around $320 million.

Dependence

Unlike most other legal commodities consumed in Australia, tobacco causes dependence in a large proportion of users. Some argue consumers take into account the chances and likely costs of dependency before beginning to consume an addictive substance. In some cases, such a consumer may still maximise their lifetime satisfaction, even allowing for the negative effects of dependence.

However, there is considerable evidence that consumers systematically misjudge the costs of smoking. In particular, young people tend to overestimate the risk of catastrophic health outcomes from smoking but markedly underestimate the risk of becoming dependent.

To the extent tobacco causes dependence, it means existing smokers are likely to be relatively unresponsive to price, and any increases in tax will increase the tax burden on them, with little change in behaviour. On the other hand, it is sometimes argued that an additional price signal through tax is necessary to deter potential consumers who are uninformed or unaware of the risk of dependence. That said the manufacture and sale of tobacco products is tightly regulated. Many of the information problems are targeted directly through public education campaigns and restrictions on tobacco advertising.

Consultation question

Q11.3 What is the appropriate specific goal of taxing tobacco? Is it necessary to change the structure or rate of tobacco taxes?

Q11.4 If health and other social costs represent the principal rationale for specific taxes on alcohol and tobacco, is any purpose served in retaining duty free concessions for passenger importation of these items?

11.3 Luxury car tax

Arising from the Parliamentary debate on amendments to the luxury car tax (LCT), the Treasurer has asked the Review Panel to consider phasing out the LCT and phasing in a tax on vehicle fuel inefficiency and consequent greenhouse gas emissions. The Treasurer has also asked the Panel to examine the fringe benefits tax arrangements for motor vehicles. This section considers the current LCT. Section 13.2 considers the environmental impact of fringe benefits tax (FBT).

LCT applies at a rate of 33 per cent on the GST-exclusive value of domestic or imported cars in excess of the threshold (currently $57,180). LCT is estimated to have applied to roughly 10 per cent of new vehicles in 2007.

Amendments to LCT, which received Royal Assent on 3 October 2008, introduced a higher threshold of $75,000 for cars meeting minimum fuel efficiency standards. Refunds are paid for certain four-wheel drive and all-wheel drive vehicles purchased by primary producers and some types of tourist operators.

Summary of key messages from submissions

Motor industry submissions generally call for the abolition of the LCT or argue that the LCT threshold should be increased to $70,000 or more. Other industry submissions claim the increase in the LCT announced in the 2008-09 Budget will reduce sales of luxury cars and, therefore, LCT revenue.

Many submissions link the LCT with environmental concerns, arguing either that the tax has no real environmental benefits or it should be replaced with a tax on cars reflecting fuel efficiency.

Some submissions argue that the LCT should not be imposed on vehicles used for business purposes, such as stretch limousines or four-wheel drives used in the tourism industry. Other submissions argue detailed exemptions and amendments to the LCT make the law overly-complicated, thereby increasing compliance costs and expanding the scope for tax-avoidance.

Other submissions note the relatively narrow base of the LCT and, in particular, that no special tax is imposed on other luxury goods. Some see this as an argument for abolishing the LCT, others as an argument for extending the LCT to other luxuries.

Taxing luxuries

The LCT was originally imposed to ensure the price of luxury cars did not fall by relatively more than the price of non-luxury cars when the GST replaced the wholesale sales tax in 2000. However, the prices for other highly-taxed goods, such as furs and jewellery, were allowed to fall. One argument for the recent increase in LCT is it makes the tax system more progressive, on the basis that those individuals who can afford to buy a car subject to LCT have a greater capacity to pay tax than others.

While some goods are used more by high income households than lower income households, consumption patterns vary considerably within income and wealth ranges. Imposing a heavy tax on a specific luxury good tends to tax the rich more heavily than the poor, but will also penalise consumers of moderate means who happen to have strong preferences for the good in question. Taxing a single luxury good or a subset of such goods discriminates against people who have a taste for the taxed goods in favour of those who prefer other luxuries. In other cases, consumers who would have demanded goods taxed at the higher rate can escape the tax by choosing to consume another product.

For these reasons, redistribution through the tax-transfer system is usually based on an individual's annual income, rather than their consumption patterns. However, some people may have a substantial capacity to pay tax despite having a low taxable income. Taxes on luxury goods may help to ensure such people contribute in line with their capacity to pay and thus increase equity in the tax system.

As the purchasing power of Australians increases, cars priced above the LCT threshold may become accessible to more consumers. Currently, thresholds for the LCT are indexed to the motor vehicle purchase sub-group of the Consumer Price Index. Historically, this has changed at different rates to both wages and other consumer goods (see Chart 11.5).

Chart 11.5: Motor vehicle component of consumer price index

Index (December 1983 = 100)

Source: ABS (2008f) and ABS (2008d).

Industry effects

The European Commission's submission to the 2008 Review of the Australian Automotive Industry claimed the LCT acts as a non-tariff barrier to trade, arguing it falls mainly on imported vehicles. While many of the imported cars that are priced above the LCT threshold are European models, the origin of the vehicle is not a consideration in whether the tax applies, and there are also a number of Australian-manufactured models affected by the tax.

The LCT is unlikely to affect world production of cars, but it may influence the production decisions of Australian car manufacturers, encouraging production of vehicles that fall below the LCT threshold.

Fuel efficiency

The introduction of fuel-efficient vehicle standards to LCT does not aim to redistribute income or wealth, but to encourage consumers to choose more fuel-efficient high price cars, rather than less fuel-efficient high price cars.

As Section 12 notes, the Australian Government currently imposes tax on fuel use, and is also introducing the Carbon Pollution Reduction Scheme as a means of reducing Australia's greenhouse gas emissions. Across the life of a car, this increases the running costs of less fuel-efficient cars relative to more fuel-efficient cars. While many car purchasers take this into account, there is an argument some consumers do not consider long-term costs when making their purchasing decisions. This raises the general question as to whether less fuel-efficient vehicles in all price ranges should be subject to a special additional tax.

The design of any potential tax related to fuel-efficiency depends on the goal the tax is trying to achieve. For example, a tax designed from a greenhouse perspective would need to take into account the Carbon Pollution Reduction Scheme and might be based on carbon emissions directly rather than fuel consumption, as this approach avoids the complications caused by different fuel types. Alternatively, if the purpose of a fuel-efficiency based tax is to conserve a non-renewable resource, then the use of non-renewable fuels in other applications would also need to be considered. Moreover, a tax on less fuel-efficient cars would not discriminate between different types of fuel.

One possible approach to encourage the purchase of more fuel-efficient vehicles is to implement a sliding-scale surcharge or rebate. Potential options are considered in the September 2008 public discussion paper of the Australian Transport Council and the Environment Protection and Heritage Council Vehicle Fuel Efficiency Working Group.

Consultation questions

Q11.5 Are taxes on specific 'luxury' goods an effective way of making the tax system more progressive? If so, what principles should apply to the design and coverage of these taxes?

Q11.6 Should the tax system have a role in influencing the relative prices of different types of cars, including luxury cars and higher polluting cars, and if so, on what basis? What does this mean for taxes on the purchase price of motor vehicles?

11.4 Other issues

Some submissions suggest that the taxation of products for health reasons be extended, notably to introduce higher rates of taxation on energy-dense, nutrient poor foods that contribute to obesity.

Tariffs

Submissions that address import tariffs are concerned with their effect on specific products (for example, motor vehicles and alcohol) rather than the general tariff as a revenue source. Of those that address the general tariff, one submission suggests that its existence provides leverage in international trade negotiations. Another considers that products should be made in Australia for the domestic market, even if cheaper imports are available.

Australian governments over the last 35 years have tended to reduce import tariff levels. The general tariff rate is currently 5 per cent of the value of the imported good. However, higher rates apply for passenger motor vehicles (and parts) and the textile, clothing and footwear industry. Further, goods may be imported at rates lower than their scheduled rate due to the application of tariff concession orders or through free trade agreements. Apart from the tariff, most imports are subject only to the same taxes, for example, the GST and excise-equivalent customs duties, that apply to domestically produced goods and services.

Tariffs assist some local firms by providing some protection from import competition. In effect, they enable local producers to increase the prices at which they can sell their goods on the Australian market and/or to increase the volume of their sales. Tariffs also impose costs on firms which use imported products that are subject to tariffs or use domestic products that are produced at a higher cost because of the tariff.

The Productivity Commission (2008b) estimated that tariffs on imports provided $9.1 billion of assistance to Australian industry in 2006-07 but also cost Australian industry around $7.7 billion in higher input prices, leaving net assistance of $1.4 billion. This net assistance comes at a cost to consumers who pay higher prices than in the absence of tariffs.

While the Review considers specific industry policies to be outside its terms of reference, it will need to consider the future revenue and other roles of general tariffs.

14 The own-price elasticity of beer has been estimated at -0.3 per cent, wine at -0.4 per cent and spirits at -1.3 per cent (Selvanathan and Selvanathan 2004).